Prudence concept is one of the basic concepts used when the financial statements are being prepared by the accountants. It is another form of accrual accounting where expenses are recorded as and when incurred not when actually paid. Same goes for revenue where revenue is recorded when earned and not when actually received.

1. PRUDENCE
as a
CONCEPT
in
ACCOUNTIN
G
Prudence concept is fundamental to accounting and
preparation of financial statements
Concept mandates that financial statements shall be true and
fair and figures reported must be prudent. Which means that
a conservative approach will be used when reporting figures
in FS specifically income and expenses
On one hand it adopts a conservative approach in recording
assets, income and profits while on the other Proactive
approach is recording expenses, liabilities and losses
Assets, profits and income are recorded once realized while
expenses, losses and liabilities are recorded if anticipated

2. PRUDENC
E
CONCEPT
A COMPANY MUST NOT OVERTSTATE ITS:
1. REVENUES
2. PROFITS
3. ASSETS
AS WELL AS MUST NOT UNDERESTIMATE ITS:
1. LIABILITIES
2. LOSSES
3. EXPENSES

3. PRUDENCE
as a
CONCEPT
in
ACCOUNTIN
G
In simple terms the business must not overvalue its profits
and assets until conclusive evidence is obtained, as well as it
must not undervalue its losses and expenses and must record
provisions even if any possibility of occurrence exists
The concept basically urges that FS must present a realistic
picture about every possible event that may impact the
decision of FS users.
If a company anticipates loss on execution of contract in
future, prudence concept urges to record a loss. Comparing it
to as asset to which the company has no title yet or has
control over it, Prudence concept urges not to record it as
asset until control is gain or income is realized as proceeds

4. PRUDENC
E
CONCEPT
Illustrations
Many International Accounting Standards (IAS) and GAAPs
have incorporated Prudence concept. Examples are:
1. IAS 2- Inventory is stated at lower of cost and NRV (selling
price- cost to sell), so whenever there are circumstances
exist that NRV of stock has fallen, the inventory will be
stated at lower of these two, thus asset is overstated
2. Provision for doubtful debts- Provision is recorded in FS
for debtors that are slow moving or uncertainty exist over
the recovery of amount or a %age of provision is set
based on past experience. It is only a possibility for
occurrence that no recovery will be made in future but
prudence concept urges to decrease debtors figure in FS
in order to make sure that debtors are not overstated
3. Loss on contracts- future losses for inability of execution
of contracts or outflow of uncertain amounts in future are
recorded as provisions instantly